Can any of the company-specific risk be diversified away by investing in both Desktop Metal and Super Micro at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Desktop Metal and Super Micro into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Desktop Metal and Super Micro Computer, you can compare the effects of market volatilities on Desktop Metal and Super Micro and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Desktop Metal with a short position of Super Micro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Desktop Metal and Super Micro.
Diversification Opportunities for Desktop Metal and Super Micro
The 3 months correlation between Desktop and Super is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Desktop Metal and Super Micro Computer in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Super Micro Computer and Desktop Metal is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Desktop Metal are associated (or correlated) with Super Micro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Super Micro Computer has no effect on the direction of Desktop Metal i.e., Desktop Metal and Super Micro go up and down completely randomly.
Pair Corralation between Desktop Metal and Super Micro
Allowing for the 90-day total investment horizon Desktop Metal is expected to under-perform the Super Micro. In addition to that, Desktop Metal is 1.34 times more volatile than Super Micro Computer. It trades about -0.14 of its total potential returns per unit of risk. Super Micro Computer is currently generating about 0.12 per unit of volatility. If you would invest 24,590 in Super Micro Computer on September 3, 2023 and sell it today you would earn a total of 2,373 from holding Super Micro Computer or generate 9.65% return on investment over 90 days.
Over the last 90 days Desktop Metal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's primary indicators remain very healthy which may send shares a bit higher in January 2024. The recent disarray may also be a sign of long period up-swing for the firm insiders.
Over the last 90 days Super Micro Computer has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong fundamental indicators, Super Micro is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.
The main advantage of trading using opposite Desktop Metal and Super Micro positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Desktop Metal position performs unexpectedly, Super Micro can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Super Micro will offset losses from the drop in Super Micro's long position.
The idea behind Desktop Metal and Super Micro Computer pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.
Check out your portfolio center.Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.
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